Should You Take Out a Business Credit Card or Business Loan?

With the introduction of credit cards in the 1950s Americans got into the habit of purchasing items and then paying them off later.

If it wasn’t enticing enough to”buy now and pay later,” credit card companies then added extra bonuses for credit card holders such as cash back and sky miles to further cement themselves as a desirable financial option.

Of course today’s credit cards aren’t just for personal use, they are for business use as well. In fact, when starting a small business many owners put essentials such as furniture, travel and in some cases inventory on their business credit cards.

The National Small Business Association estimates that 44% of small business owners use business credit cards for their monthly expenses.

Many of us are so used to using credit cards that we do not consider a business loan which may, in fact, be the more financially sound option.

Today we’ll review the pros and cons of using a credit card vs. taking out a business loan. There are times when each option may be the best one for you, so it’s important to know what your options are and how each one works in your favor.

The Benefits of a Business Credit Card

First we’ll look at the pros and cons of using a credit card for your small business.

Pros of a Business Credit Card

Often easier to obtain than a loan

Does not require collateral

Helps establish or build credit

Possibility to take part in a rewards program

Consof a Business Credit Card

Fluctuating interest rates

Security issues

Monthly expenses associated with holding a card

A credit card can provide a cushion for your business in slower times and is often much easier to obtain than a business loan. Holding a business credit card can help your company establish or build credit and taking part in a rewards program is a nice incentive.

The cons of having a business credit card are threefold. Each card comes with an interest rate which can increase as time goes on. With a business credit card the terms can change unlike a business loan which retains the terms that were agreed upon at signing.

In addition, a business credit card is not as secure as a personal credit card. A business has numerous people coming in and out on a daily basis; there may be employees, vendors, customers or repairmen who can pocket the card. While a credit card issuer will often protect a personal credit card, a business may be held liable for certain types of fraud on its card.

Finally, business credit cards will usually come with additional expenses on top of interest such as a set monthly or annual fee for simply holding the card.

The Benefits of a Business Loan

Now let’s take a look at the pros and cons of taking out a business bank loan.

Pros of a Business Loan

Puts a large sum of money at your disposal

Interest rates may be tax deductible

Low and fixed interest rates

Cons of a Business Loan

May require collateral

Often takes months to receive approval

Poor personal credit may present a barrier to approval

The pros of a business loan greatly outweigh the cons. If approved you’ll receive a lump sum of money to expand and grow your business, usually at a low and fixed interest rate.

Did you know loan interest rates can be tax deductible unlike business credit cards? Come tax time this can relieve some of the financial burden of being an entrepreneur.

The downside is that a business loan is generally only approved for companies that are already thriving. In short, companies that are looking to expand and grow an already profitable business are more likely to be approved than those experiencing hardship (or those just starting up). Additionally, the majority of banks will take weeks or months to review your business plan before a final decision is made.

If you have poor personal credit, no collateral or are experiencing hardship you will likely get denied for your business loan.

Taking Out a Working Capital Loan

There is a specific type of loan that many small business owners can benefit from called a Working Capital loan.